2023-05-28 08:49:14 ET
Summary
- Dorchester announced a Q1 2023 distribution of $0.989656 per unit, well above my expectations for $0.80 to $0.85 per unit.
- This was driven by increased production, particularly NPI production.
- Dorchester's combined average daily royalty and NPI production was up +25% compared to Q4 2022 and over +50% compared to Q3 2022.
- Dorchester's production varies from quarter to quarter, so it could drop lower next quarter.
- I have increased my baseline production expectations though, and thus have also increased my estimate of Dorchester's value to $32 per unit.
Dorchester Minerals ( DMLP ) announced a distribution that was well above my expectations for Q1 2023 . It announced a distribution of $0.989656 per unit compared to my expectations for a $0.80 to $0.85 per unit distribution. The higher distribution was largely attributable to another large spike in Dorchester's NPI production.
Dorchester's average daily royalty production was up +7% in Q1 2023 compared to Q4 2022, although the oil cut for that production went down from 64% to 58%. During the same period, Dorchester's average daily NPI production increased by +54%, while its NPI oil cut decreased by a smaller amount from 69% to 65%. Dorchester's NPI production also increased substantially from Q3 2022 to Q4 2022.
Dorchester's production (especially its NPI production) can vary a fair bit from quarter to quarter, so I wouldn't expect its production to continue increasing rapidly (up +52% since Q3 2022, with acquisitions only fueling a small part of that growth).
However, the growth over the past two quarters has resulted in an upward adjustment to my baseline production expectations, to around Q4 2022 levels. As a result, I have increased my estimated of Dorchester's value to approximately $32 per unit in a long-term $75 WTI oil environment.
Increasing Production
Dorchester's total natural gas production and its NPI oil production surged in Q1 2023. Its total natural gas production went up +39% compared to Q4 2022, while its oil production went up +13%, driven by NPI oil. This continues the surge in NPI production, which was already up substantially in Q4 2022 compared to Q3 2022.
Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | |
Royalty natural gas sales (mmcf) | 1,105 | 1,086 | 1,078 | 1,330 |
Royalty oil sales (mbbls) | 318 | 322 | 319 | 302 |
NPI natural gas sales (mmcf) | 353 | 290 | 495 | 864 |
NPI oil sales (mbbls) | 139 | 80 | 185 | 269 |
Dorchester's production can be quite variable from quarter to quarter, so I don't expect this type of quarter-over-quarter growth to continue. However, I now expect Dorchester's average quarterly production to be closer to Q4 2022 levels.
Relative Importance Of Natural Gas And Oil
Natural gas accounted for approximately 39% of Dorchester's production in Q1 2023, up from 34% of its production in Q4 2022. Of the two, oil is far more important to Dorchester's results though.
A $1 change in realized natural gas prices would change Dorchester's quarterly distribution by approximately 5.3 cents based on Q1 2023 production levels and realized prices. A $5 change in realized oil prices would change Dorchester's quarterly distribution by around 6.9 cents using the same parameters.
A $1 change in realized natural gas prices is around a 32% change though, while a $5 change in realized oil prices is only a 7% change. Thus it takes a very large percentage change in realized natural gas prices to have the same impact on Dorchester's distribution as a relatively modest change in oil prices.
Estimated Valuation
I have bumped Dorchester's estimated value up to $32 per unit at my long-term commodity prices of $75 WTI oil and $3.75 NYMEX gas. This is a $2 per unit increase from before due to the combination of increased production (compared to my previous modeled baseline production) plus a switch from the $70 oil and $4 gas I had used as long-term commodity prices.
I am assuming that Dorchester's production will average close to Q4 2022 levels in the future. At that production level and $75 oil along with $3.75 gas, Dorchester should be able to provide a quarterly distribution of around $0.80 per unit.
Conclusion
Dorchester's production increased significantly in Q1 2023 after strong production growth in Q4 2022. This puts its total production (combined royalty and NPI production) up over +50% compared to Q3 2022 levels and contributed to its distribution reaching near $1 per unit for Q1 2023.
I don't expect that sort of production growth to continue and think that it is more likely that Dorchester's production declines back towards Q4 2022 levels.
At Q4 2022 levels of production though, Dorchester should still be able to offer around a $0.80 per unit quarterly distribution at $75 WTI oil and $3.75 NYMEX gas. This would support a value of $32 per unit for Dorchester.
I'd also expect Dorchester's Q2 2023 distribution to be relatively high, as that would partly benefit from cash receipts related to Q1 2023 sales (which had very strong volumes).
For further details see:
Dorchester Minerals: Q1 2023 Distribution Reached Nearly $1 Due To Increased Production